MNOPF weighs up DC section to manage s75 risk

The Merchant Navy Officers’ Pension Fund (MNOPF) is looking at offering its employers a defined contribution (DC) section as part of an ongoing process of managing their statutory debt risk.

Section 75 debts are triggered when an employer to a pension scheme effectively exits the scheme by ceasing to employ an active or eligible member.

The MNOPF has around 350 employers but has been closed to new entrants since 1997. Only 100 of those employers are currently employing active members.

“[A new DC section] would give the employers another tool to use to manage their section 75 exposure,” said MNOPF chief executive Andrew Waring. “Section 75 debts can trigger insolvencies in companies.”

Without a way to avoid the statutory debt, these employers would have to pay their share of the scheme's deficit on a full buyout basis.

According to last year's summary funding statement, the fund had a combined shortfall of £320m on an actuarial basis.

The MNOPF is considering opening the new DC plan in the new section of the fund.

Offering a DC scheme is just one of the ways multi-employer schemes are currently trying to mitigate the impact of section 75 on their employer members.

Debt exercise

The MNOPF undertook an assessment of its section 75 exposure from the end of 2010, when it wrote to employers asking them the following questions:

1. Has the participating employer ceased to employ active members?

2. Did the employer have eligible members, pre-April 2008, which it has since ceased to employ?

It also required the employer to notify the fund if it ceased to employ eligible members in the future.

Now you can apportion just a percentage of the debt. There is a little bit more flexibility

Jane Samsworth, Hogan Lovells

The MNOPF found a “handful” of employers had triggered the debt in the past but should not have, as they still employed eligible officers. It is currently taking legal advice on these debts.

“It’s very hard taking money back out of a pension fund once it is in,” said Waring. “We will be dealing with those employers on a case-by-case basis.”

The investigation also found about 40 employers that had triggered a section 75 debt and previously thought they had not been liable.

The fund expects all these will know where they stand by the middle of the year but most employers will have a strong hint of their liability in the information they supplied.

Evasive manoeuvres

From January, schemes can enter into a flexible apportionment arrangement (FAA) to share out liabilities to employers.

Previously, schemes had to calculate a fixed amount of the statutory debt for the exiting employer to pay.

There is always a risk the government will come back later and change the legislation

Robin Ellison, Pinsent Masons

"Now you can apportion just a percentage of the debt," said Jane Samsworth, head of pensions at Hogan Lovells. "There is a little bit more flexibility."

The MNOPF is not considering such an arrangement due to its legal structure of joint and several liability, Waring said.

Opening a DC section or putting in place an FAA are not the only ways employers can side-step the immediate triggering of section 75.

Another is to employ an active or eligible member as a buffer against the debt.

Robin Ellison, head of strategic development for pensions at Pinsent Masons, said: "It's expensive, time-consuming and uncertain.

"We are all playing legislative games and we shouldn't have to do this."

In addition. there is no guarantee any action a scheme takes will not be undermined by further developments.

Ellison added: "There is always a risk the government will come back later and change the legislation."